How To Transform Your Sourcing Daydream Into Reality
"Vision without action is a daydream. Action without a vision is a nightmare." ~ Japanese proverb
What truly is vision put into action? In the world of Procurement, the answer is Strategic Sourcing. As Procurement professionals, we know that the overall goal of delivering substantial savings is enabled through this vital Element. Many organizations source their spend but the first word is often forgotten - Strategic. Strategic Sourcing is a process-based, data driven, six-sigma oriented methodology used to gather information and identify requirements to best manage and leverage organizational spend.
Strategic Sourcing is neatly tucked between our second and fourth Elements - Category Management and Contract Management - for good reason. A full Category Management assessment aids understanding and gains support for the overall strategy of the category (and sub-categories). Strategic Sourcing projects are a natural extension or output of the Category Management process and are prioritized based on risk, complexity, business need, savings, value, and effort. The Strategic Sourcing project outcomes then feed the Contract Management process and help create the agreed on terms and conditions, business requirements, key performance indicators (KPI's) and pricing with the selected suppliers. More on Contract Management in the next blog!
Strategic Sourcing executes the opportunities identified through the Category Management process (see previous blog "Is Your Procurement Organization Really Conducting Category Management?" for more information on Category Management). Think of Category Management as the parent, with Strategic Sourcing as its children.
Strategic Sourcing has been a popular Procurement practice for quite some time and many organizations believe they are doing Strategic Sourcing. In reality what they are doing is more aligned with conducting tactical buying or reactive sourcing - taking data / information, running RFPs or eAuctions and executing new contracts. There is no tie-in to an overarching Category Strategy or thinking strategically and the end result of the project is typically not optimized.
How can your organization avoid these reactive daydreams / nightmares and realize the effective Strategic Sourcing vision? Here are a few tips based on our experience:
- Identification and active engagement of stakeholders is one of the most critical aspects of Strategic Sourcing. Taking the time to ensure the correct business stakeholders for the specific product / service are engaged throughout the process will enable buy-in and a more efficient change management process. Before completing this part of the process, ask yourself:
- Do you have all the stakeholders identified?
- Do you understand their role and level of support for the project?
- Do you have commitment from them to be involved in the process?
- Do they understand what is required of them throughout the process?
- Understanding your current state is important to be able to measure progress. How can you set goals and report on value delivered if you don't know where you are starting? A detailed understanding of your "baseline" spend, including volumes, unit price, key category price drivers and total cost of ownership will provide the detail needed to build your bid sheets, analyze and compare supplier bids, and integrate pricing into the contract. Getting stakeholder agreement on the spend baseline will help avoid disagreements later in the process when determining the benefits to the organization.
- A holistic approach to identifying business requirements including business needs for delivery, quality, service, cost and innovation should be undertaken. True Strategic Sourcing projects can impact the entire organization. Therefore, stakeholder input is critical at an early stage in the process. However, it is important to remember that requirements can impact cost, so while you work with stakeholders to identify requirements, make sure to question need vs. wants (unnecessary wants can become expensive daydreams). Necessary requirements should then be used to develop the Key Performance Indicators that are subsequently used to measure, track and manage supplier performance (our 5th Element). See how it is all connected!
- Selecting the best-fit strategy is critical to the success of any Strategic Sourcing project. Once you have the right stakeholders involved, understand the current spend baseline, assess the broader market for the category and have captured the key business requirements, it is important to stop, reflect and assess. This is the time to make sure you develop a vision and take some action to behave like the first word says - Strategic. Look at all the data / information and assess if there is a gap between the natural category dynamics when compared to your current behavior . Once you understand the interactions and identify the opportunities, you need to match this to the best strategic lever in your sourcing toolkit - sending out an RFP should not be the default option. In fact, depending on the number of suppliers, importance / impact of the category and issues identified, sending an RFP may actually be the wrong option. Failure to match the Sourcing strategy to the category dynamics is one of the most common mistakes made across all industries.
- Conducting insightful Category Management before any Strategic Sourcing project is initiated not only provides a more integrated and planned vision for change, but also ensures the execution of any associated Strategic Sourcing project is more efficient. Doing Sourcing projects without a broader Category vision may only create short-term / non-sustainable benefits for the organization and generate longer-term constraints or problems. How do you know you are allocating resources to the right Sourcing projects or that you are executing projects that will provide the most value for your organization? Conducting Category Management eliminates the guesswork and sets a path for successful cross category Strategic Sourcing.
Execution of a vision is never easy and requires effort. However, the Nitor Strategic Sourcing process, tools, ad playbook utilizes 5 stages based on a six-sigma methodology that will help execute your vision:
- Stage 1 - Project Definition: Define the project charter, engage stakeholders and develop a project plan. Getting agreement on project goals, objectives, roles and timeline early in the process will help avoid issues later on.
- Stage 2 - Gather / Analyze: Developing a detailed category spend analysis and identifying business requirements will help understand the current spend baseline and key needs of the business. Successfully gathering and understanding baseline spend and business requirements will determine the success or failure of your project.
- Stage 3 - Strategy Creation: Using strategic tools, outputs from earlier steps in the process, and stakeholder input, you can assess and develop the most appropriate sourcing strategy to go to market and enable the best chance for success.
- Stage 4 - Execution: Following the work in stages 1-3, going to market to execute your category strategy, select suppliers, negotiate and execute contracts, should now be much smoother. If your organization tends to go from a project idea to jumping straight to this stage, you are tactically sourcing not Strategically Sourcing.
- Stage 5 - Value Management: Ensuring the value created from a project is realized is critical. Most companies lose on average 30% of the benefits from a Strategic Sourcing project through switching off when a contract is signed. It is imperative that you opertionalize a contract, measure and manage supplier performance and track value delivery.
A vision in life or business is never realized without taking action. Action without a through approach creates a nightmare. Take a look at your organization's sourcing practices - are they actually strategic or are they action without vision and methodology?
As you can see, the Nitor 8 Elements are starting to come together. The first element, Spend Analysis, provides the data needed to develop an insightful Category Management plan. This in turn provides clear and defined strategies for each category to create a list of prioritized Strategic Sourcing projects based on risk, complexity, business need, savings, value, and effort, with forecasted impact to the organization's bottom line. The Upstream Procurement Trifecta is critical to enabling a more planned and proactive value creation environment.
Be sure to check out the next blog in our 8-Element series to learn how to leverage the outputs from Strategic Sourcing and improve the Contract Management process. www.nitorpartners.com