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Thursday, April 17, 2014

Don’t Get Locked Into the Institution of Strategic Sourcing

Kelly_Barner_2013The reputable Sourcing Innovation blog uses Wikipedia’s definition to describe strategic sourcing as “an institutional procurement process that continuously improves and re-evaluates the purchasing activities of a company.” In their efforts to implement a strategic sourcing program, many organizations start by defining a process that begins with the identification of an opportunity; proceeds through data collection, supplier bidding and negotiation; and concludes with contracts and ongoing supplier management.

Over time, it is not uncommon for such a process to become more of a mandatory checklist than a guideline, and the result is anything but strategic. In order to deliver continuous improvement, it is essential to identify desired outcomes and plot a path to them that is specific to the category of spend in question. Even the “sourcing” part of strategic sourcing is not to be dismissed as just locating a product or service that meets specifications. Make, lease, buy, outsource, nearshore, and offshore are just a few examples of the acquisition options available for consideration.

The working relationship between procurement and the rest of the business heightens the risk of an overlystandardized process. Internal stakeholders are usually (and understandably) partial to their current suppliers, specifications, and management of the category. Following a new acquisition process is already more change than they are often ready for, but starting with a blank canvas can be terrifying and cause resistance and stifle collaboration.

In order to avoid getting trapped by the institution of strategic sourcing (wonderful though it may be), every project needs to be approached with flexibility: finding the right source of supply given the relevant costs, risks, ownership structure (purchase, outsource, lease, etc), and plans for the future. Strategic sourcing might, instead, be thought of “opportunistic acquisition.” Rather than centering a project on a well-intended but confining process, identify the unique attributes of that spend category. Find places where deviating from the standard process offers tangible benefits.

Credit: Vlado at FreeDigitalPhotos.net

Be flexible in every procurement project! Credit: Vlado at FreeDigitalPhotos.net

Here are a few methods of “opportunistic acquisition”:

Flip the steps: The strategic sourcing process usually calls for building an internal team and kicking off the sourcing project before conducting an industry analysis, but internal stakeholders may be critical of having to work with procurement. By reordering the process and doing an industry analysis first, procurement will be better positioned to discuss the opportunities for improving the spend category with stakeholders and earn their respect with knowledge and preparation.

Run a Request for Information: If there seems to be an overwhelming number of specifications for the product or service being purchased, it is important to understand which ones affect costs. Run a Request for Information (RFI) to have suppliers identify non-standard or costly specifications in advance of bidding. The specifications may be left unchanged, but the decision to accept additional costs will be conscious and made based upon a full understanding.

Don’t go to bid: While a contract may about to expire, procurement should not assume that the right approach is to run the category through the strategic sourcing process, regardless of whether it has been sourced before. Identify the potential for savings as well as the likelihood for changes in that market. Often, meeting with an incumbent supplier and signing a modified contract extension is a fast, inexpensive, resource-light strategy.

 

Deviating from a standard process should be considered in all cases, but do so only when there are measurable benefits. Pressures from internal stakeholders, complaints from incumbent suppliers, or resource constraints in procurement are not appropriate reasons to alter or shortcut the process.

The procurement governance model may require that process changes go before an executive review board. Such review opportunities should be welcomed to demonstrate that procurement is a value-add team with the organization’s best interests in mind. Being opportunistic and identifying new sources of supply, more flexible contract structures, or pricing models that better match the cost basis of a product should be encouraged as a part of strategic sourcing whether it aligns with the letter of the process or not.

While the benefits to the organization of a category-specific approach are easy to demonstrate, the benefits to the individuals tasked with carrying out the process are even greater. If a process can be captured in a checklist-like format, the results are limited — as are the career progression opportunities for procurement professionals. Over time, the cost to execute becomes the driving metric, opening the procurement function up to alternatives such as outsourcing or participation in a group purchasing organization (GPO).

Delivering continuous improvement year over year and contract after contract requires more creativity than any process can deliver. The strategic sourcing process should still be considered the starting point for any sourcing project, but it should not be followed before reviewing the internal and external factors affecting risk, availability, costs, and innovation and making sure they are incorporated – strategically.

Credit: artur84 at FreeDigitalPhotos.net

Credit: artur84 at FreeDigitalPhotos.net

According to Merriam-Webster, institutions are “firmly associated with a place or thing” and “established organization[s].” Institutions have positive implications as well as negative ones, and those should be sought by procurement. A standardized process that has been endorsed by executive leadership provides procurement with a foundation for strategy. Procurement wants to be associated with the act of acquiring a product or service, and it also wants to be an established function positioned for long-term success.

The risk with a standardized process is in allowing value creation to be associated with the process rather than the team running it. Demonstrating leadership by purposefully deviating from the process when opportunities arise meets the goals of the organization, the procurement function, and the individual professionals all at once.

“Marriage is a wonderful institution, but who wants to live in an institution?” — Groucho Marx

 

Kelly Barner is the co-owner of Buyers Meeting Point, at www.buyersmeetingpoint.com, an online resource for procurement and purchasing professionals. Her unique perspective on supply management is based on her time as a practitioner, a consultant at a solution provider, and now as an independent thought leader. Kelly has led projects involving members of procurement, supplier, and purchasing teams and has practical skills in strategic sourcing program design and management, opportunity assessment, knowledge management, and custom taxonomy design. She earned her MBA from Babson College, a Master of Science in Library and Information Science from Simmons College, and a Bachelor of Arts in English and History from Clark University. In 2012 and 2013 Kelly was awarded a Provider ‘Pro to Know’ award by Supply & Demand Chain Executive magazine, and in 2013 she was also recognized as one of 28 “Top Female Supply Chain Executives.”

 

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