I interviewed Arvind Swamy who discussed Strategic Sourcing versus Traditional Procurement.
How did strategic sourcing come about?
15 to 20 years ago when companies only had purchasing departments. The procurement function was treated as a need or necessary evil. When companies would procure their goods or services they would cut a PO. Not much was talked about leveraging suppliers and putting contracts in place to protect companies and suppliers. About 10-12 years ago companies started getting smarter and decided that for any good they have:
They should have a limited number of suppliers
They should be able to manage it. They should understand what they buy and how changes in marketplace effect what they buy and pay.
They should know how their suppliers are doing. Are they best in class and delivering good quality?
Currently, a lot of companies are going down the path of strategic sourcing. I estimate that 20% of companies do strategic sourcing and do it well. Another 20% of companies have a strategic sourcing group but they have a lot of room to improve. 60% of companies are still making do with the traditional sourcing model.
What is strategic sourcing?
Strategic sourcing comprises spend analysis, category management and more. A good robust definition of the sourcing needs within a company would include:
The need to define what you buy and what you need. A good presentation of this includes your current state and your future state where you want to be in 5 years etc.
You also need a good understanding of total costs, which includes shipping, costs due to poor quality etc.
There are suppliers who also go above and beyond. When you compute the total cost for them you are getting “freebies” from the suppliers which also need to be 'costed out' so that you understand what you are getting from a supplier.
We do a market scan
Following this you devise a market strategy based on suppliers and where they are located.
You then decide if you need an RFI/RFP,
Followed by negotiations.
Finally, you do supplier performance management.
How is strategic sourcing different from purchasing and procurement?
Traditionally, purchasing had been more operations oriented in that it was more needs based. Whatever a company needed the representative would find it. In some cases they put in long term contracts. But they didn't combined the vendors and categories and have as few suppliers as possible, with good management. Managing suppliers and spend is what is different.
Can you talk about the technology aspects of strategic sourcing?
With the Internet we have RFI and RFP tools. In the past you had to do it by snail mail or email. The Internet tools give you the power to set up an RFI/RFP where the supplier puts the information in and the system checks for formatting and complete information. Finally, the tools can place all supplier bids side by side to provide an easy way to analyze and see what the suppliers are bidding.
We also have reverse auction tools where the suppliers can see the lowest bid. Therefore, some suppliers may be motivated if they want to play in the space, while others will drop out. It creates some amount of transparency and reduces the RFQ process to a day.
You also have tools to send reminders when contracts will expire etc. Contact management tools connect directly with ERP systems so that pricing and terms and automatically picked up in the system.
We also have tools for reporting and classifying spend. This is also a big task. With data intelligence reporting capabilities your spend information is parced into categories and aggregated to provide a corporate view of capabilities.
We have supplier relationship management portals. Most of the time suppliers fail because of payment issues and not knowing when they will be paid. Suppliers can now log in and check the status of how they are doing in terms of quality, delivery, payment status etc. This goes a long way in helping to manage suppliers with technology.
What is the first step in strategic sourcing?
The first step would be to understand your spend. Creating the spend database. Companies need to compile all forms of expenditures, with the exceptions of salaries etc. They need to adopt a common spend categorization method. The third step is the cleanse the data based on intelligence you have and industrial classifications. You then verify with what is in the business. You further classify the spend management database.
How do you manage strategic sourcing?
The way you manage it is to first get the business and cross functional leadership behind you. You need to make sure the goals in strategic sourcing are shared with the leaders of the companies. You strategize on spend categories and make sure you get concurrence from all cross functional leadership.
You set savings objectives against each category and make sure they are aligned with the enterprise.
Lastly, you assign roles and responsibilities I terms of who will do what in terms of managing the spend and driving cost reduction.
Procurement only has a responsibility of supplier facing issues. Once the new supplier comes on board or the new pricing comes on board, the rest of the company has to follow. Finance has to honor the new price and pay accordingly etc. All of these people have to be on board.
Can you talk about category management and some of the methods to measure organizational performance?
Once you pull the data and classify it into category, each has its own nuances for the way it should be managed. The way you manage electricity will be different from professional services. You hire subject matter experts to manage these categories. Some of the steps involved are:
To analyze current supplier relationships
Define the business needs and objectives for that category and your business
Look at market and understand where the action is in terms of supply base and what you need to do strategically. (ie., nearshoring in Mexico or elsewhere).
Once you do this new opportunities will appear in terms of saving or better performance, quality delivery etc. Once you have defined the opportunities you establish goals and go after them.
Some of the metrics that are involved in strategic sourcing would be:
Spend Vendor Management – Contracted spend you are actively managing versus total spend
Spend With Preferred Suppliers – Suppliers you have negotiated good deals with and are meeting your needs versus total spend.
Active Suppliers Per Employees – The supplier count is a key measure in strategic sourcing.
Spend To Savings Ratio, Savings Per Procurement Employee Ratio and Budget to Savings Ratio are some of the key ratios for measuring strategic sourcing performance since the key role will be to drive savings.
About Arvind Swamy
VP | Procurement | Strategic Sourcing | CPO |
Consultant | Adviser | CEO | CFO |
Board Level at Various Clients