Beyond Strategic Sourcing
Over the past fifteen years, strategic sourcing emerged as a leading methodology, ultimately becoming an industry standard across the global corporate procurement landscape. Originally designed and promoted by top consultants at McKinsey Associates, AT Kearney, and others, and later accelerated by e-Commerce providers; the discipline fundamentally altered the way companies purchased everything from custom components to paper clips.

The results of this activity have been far-reaching, but perhaps most notable was the impact of the practice on the vendor community. By restructuring the process through which requirements were being fulfilled, suppliers’ offerings were, to a great extent, commoditized.

Process and technology combined to limit suppliers’ abilities to “work the system” - requirements were being better defined, suppliers better qualified, negotiations more transparent. The resulting market dynamic put providers in a box. The intent of strategic sourcing was not to ignore the value of a supplier’s total offering, it was simply to quantify it. The solution however, is beginning to show its age, or at least its limitations. In perhaps the ultimate irony, the process that commoditized nearly every spend category it touched, has itself become a commodity.

As a skill and a process, strategic sourcing and its related tool set now have a clearly defined value. No longer are these capabilities the high-priced intellectual domain of a handful of consultants, nearly every Global 2000 company practices comprehensive strategic sourcing, and has for a number of years.

The thrust of this commoditization is that the piece-price savings aspect of nearly everything a company procures has been exhausted; a fact becoming especially apparent in the current scramble to identify quick savings due to the struggles being endured by so many companies. The low-hanging fruit has been harvested several times over, and rest of the tree is beginning to look pretty bare. Spend management professionals can only reduce costs through sourcing to a certain extent, or risk disrupting their business or bankrupting their suppliers.  

The future of spend management lies in a combination of advanced supplier and contract management, combined with sophisticated supplier development and analytics to identify and quantify new generations of savings to buying organizations.

Collaboration
The purpose behind employing strategic sourcing processes has never been a mystery; companies needed a more effective way to impact their bottom lines. Indirect spend management was an undiscovered science, and the time to rationalize those markets had long since passed.  Strategic sourcing was a great solution to the problem, and the application of those principles successfully helped to bring services and indirect goods markets into line.

The continuing need to save will not be solved by strategic sourcing negotiations as we have come to know them, particularly within more advanced sourcing organizations that have spent the last 15-20 years repeatedly sourcing these categories. The successful spend managers of the future will be thinking in terms of partnerships with real, productive, and lasting relationships with suppliers that result in creating substantive value for buying organizations.

The challenges of internal stakeholder alignment, implementation, systems integration, and contract compliance are each exacerbated by a move to a new supplier. While players on both sides of the equation say they want these types of relationships, can both buyers and sellers do their part to ensure real partnerships are established and maintained?

While there exists any number of alignment, reporting, and value creation issues that will have to be discussed in more detail, the key elements to successful partnerships are easy to identify;

The buying organization must:

• Eliminate the constant threat of being “bid out”
• Invest the appropriate time and personnel in managing the relationship
• Implement and track supplier recommendations for total cost of ownership improvements
•  Develop ways to quantify and report total value savings

The selling organization must:

• Be forthcoming with aggressive pricing and market-leading terms
• Invest the appropriate time and personnel in managing the relationship
• Make viable and impactful recommendations to support continuous improvements
• Adapt to customer requirements for benchmarks and other reporting

Identification and ease of implementation are two distinctly different things. The strict examination of business fit will be complemented by a keen focus on cultural fit. Organizational readiness to adopt a partnership approach must be recognized early in the process if an approach of this nature is going to work. Even in a “trust but verify” environment, trust is half the equation. A company that is not prepared to have this type of relationship is not going to be successful in employing this approach.

Those organizations that are prepared to take this step have an unprecedented opportunity; the potential to dramatically impact their bottom lines with the support of their internal stakeholders and without risking the functionality of their indirect supply chain.

Showing a United Front
In the vast majority of companies, procurement doesn’t “own” any spend categories. The era of strategic sourcing gave spend management professionals more visibility, more influence, and in some cases actual control over a handful of spends. With that said, decision power over how to handle most indirect categories has been retained by human resources, IT, marketing, facilities, finance, and the other functional groups within companies that manage these spends.

This dynamic has long been a source of friction and counter-productivity for companies both large and small. In rare situations when strategic sourcing initiatives have been forced on these functional groups by leadership, the resulting dynamic was one of distrust between the function and procurement. Grassroots efforts by procurement to create internal relationships with stakeholders take a long time to gain traction, and require a commercial approach that many purchasing departments do not possess the skills to apply.
Most of the disagreements between the groups stem from a common set of misconceptions; the functions think procurement will accept the lowest cost solution regardless of service and quality requirements, while procurement believes the function will ignore cost and risk management to maintain relationships with incumbents. While both of these positions are unfair generalizations, they are based on truths. Suppliers are not ignorant to these dynamics, and they have historically used this fundamental disagreement as a point of leverage in their own dealings with customers. A refined approach to sourcing with partnership as a base will allow the functions and procurement to align their objectives and show their suppliers a united front. This is a key element in gaining buy-in from suppliers in this process.   

Creating a More Reliable Supply Chain
As the volatility of global supply markets continues to increase, it is more important than ever that procurement professionals become risk management professionals. Having a good deal is important, having a reliable deal is even more important.

The potentially contentious environment created by a series of ongoing strategic sourcing initiatives does not lend itself to the kind of relationship building that companies need in order to secure their supply chain. The idea is not to suggest buyers pay more to ensure that they have happy suppliers. Instead, suppliers who are engaged in more substantive relationships with buyers are the most likely to extend payment terms, share savings and work with buyers to navigate through the myriad challenges that can arise during the tenure of an agreement.

Buyers need suppliers that will be able to consistently deliver quality products and services in a timely and cost-effective way. If you find a supplier with those qualities, switching providers is at least short-sighted and at most a risk to your business. An environment of partnership on the heels of years of strategic sourcing projects allows an organization to manage risk by working with qualified suppliers to create continuous improvements.

The application of these principles creates less disruption to the business, avoidance of costly implementations and opportunities for greater compliance to corporate contracts.

Next Generation Procurement: Strategic Category Management
Procurement professionals already look at their vendor base and recognize the importance of being a “customer of choice.” They want to be important to their suppliers so that they can optimize the value they drive out of those relationships. However, if a customer views their contracts as being no longer than 30 days because every contract has a 30-day “out,” then their suppliers will view the relationship the same way.

The risk a company faces in constantly sourcing that agreements is good suppliers will not perform at a high level for what they feel are unacceptable margins. Companies, in turn, will not deal with suppliers who are unable to support their needs to reduce cost over time.

The solution to this dilemma is called Strategic Category Management.

The Components of Strategic Category Management
The future of procurement lies in a combination of disciplines designed to address spend management challenges in an evolving, global economy. While strategic sourcing principles will still be applied in areas that need to be rationalized given market conditions, the thrust of the activity will be based on these components. This point should not go unrecognized. Even in an environment of broadly adopted strategic category management (SCM), maintaining your strategic sourcing capabilities is important, as this skill set will remain relevant, particularly if a certain supplier/supply base is resistant to SCM methodologies. Strategic category managers help to develop suppliers and make them better, more effective contributors to the supply chain.

In order to successfully take hold of this dramatic new approach in the post-strategic sourcing era, companies must be organizationally prepared to do the things that are necessary to manage the whole lifecycle of their contracts. This includes the adoption of six skill-sets not currently resident within many corporate spend management organizations.

Analysis: The identification and realization of savings will not be dismissed in the SCM approach; however, the ability to quantify and report those savings will be a more complex and challenging process. Having the skills to measure total cost of ownership improvements and demonstrate the dollar value of those changes to the CFO is paramount to the success of implementing SCM.

 
Supplier Management: Relationships take time to cultivate, and good ones take a lot of time. Companies that want to see the fruits of SCM must be prepared to invest time in all aspects of supplier management, including advanced reporting, auditing and relationship building. The supplier relationship manager is the tip of the spear of SCM efforts.

Contract Management: Creative relationships must be governed by creative contracts, and advanced contract management is the centerpiece of effective SCM. By employing the systems and skills required to be best-in-class contract managers, companies create significant efficiencies while mitigating the risk associated with long-term contracts.

Talent Management: When companies moved from traditional procurement practices to strategic sourcing, they identified a talent gap. This migration will be no different. Perhaps the biggest obstacle between where must companies are now and becoming leading SCM practitioners is the development of the right people. A deep understanding of what skills will be required, where to find them and how to keep them is fundamental to the next generation of spend management.

Information Management: “Trust but verify” means having something to verify. The ability to gather information from suppliers, users, and outside sources is a critical element of SCM. In the absence of this information the ability to understand market dynamics and what represents best of breed is lost. Furthermore, companies cannot just rely on having this information, they must know how to read and respond to it.

Supplier Development: With the impact of strategic sourcing ebbing and the need to create savings on the rise, the final component of SCM is arguably the most important. Supplier development means the ability to apply the category expertise and supplier relationship management to identify opportunities, creating total cost savings above and beyond piece price reductions.

Applied together, these functions give procurement groups the ability to create dramatic and sustainable value for their companies. But with so many parties involved, the risk of confusing the situation is elevated. The following is an example of how this approach works.

 
The SCM approach begins by marrying the critical skill sets within the buying organization to ensure that (i) all of the objectives of the company are being met and (ii) a unified front is being shown to the supply community. This approach is important for many reasons, but most notably because it gives the supplier relationship manager access to the category knowledge that is resident within their organization.

In this example, the HR lead and the supplier relationship manager work together to develop a strategic category management strategy for the relocation services category. This includes, but is not limited to:

•  An evaluation of the current state of the supplier relationship
•  A high-level analysis of the market
•  What pricing and service improvements are required by the organization
•  How the category can be best promoted to optimize compliance
•  What information and reporting are crucial to the ongoing monitoring of the supplier
•  Plan for the future of the contract and the supplier relationship

In putting this plan together, the HR lead and supplier relationship manager will interact with both their internal teams and the supplier(s). They may determine this is a category that still needs to be rationalized by means of strategic sourcing; but for the purpose of this example we can presume the company is already beyond that point.

Once the information in the plan is populated, the HR lead and supplier relationship manager, with support from their respective teams, join together to execute it. Over the lifecycle of the supplier relationship, they combine to solicit feedback from end users, practitioners, and the supplier for use by the SCM team to make improvements to the agreement and the relationship. In this situation, the agreement can be framed as a “lifetime contract,” with safeguards put into place to avoid falling out of market. This increases the importance of both the contract management and analysis functions, which will have primary responsibility for the periodic benchmarking and auditing of the agreement to establish the consistency of its value.

Organizationally, each role within the SCM team should be scalable because the primary functions of analytics, contract management, and supplier management are not category-specific. Since the category expertise is being generated from the functional group (in this case, HR), the SCM team should be able to move from category to category without missing a beat.

The only exception to this approach would be to optimize the interactions by assigning a dedicated supplier relationship manager to each functional group. This approach will help to reduce the organization’s reliance on “tribal” knowledge, while allowing the core of the SCM to act as a shared service across functions. The structure is efficient, but it also helps to maintain clear and open lines of communication between spend owners, procurement and suppliers.

Selling the C’s
You can’t make somebody understand something if their salary depends upon them not understanding it.
- Upton Sinclair

CFOs, to their credit, are single-minded. If a solution cannot be clearly quantified as a reduction in cost, then they will not count it as savings… nor should they. They have managed their organizations to this end, and procurement groups are measured on the delivery of implemented, hard dollar savings. There is no need to change this approach, but getting the CFO to recognize there are more ways to skin the savings cat is a necessity.  

This dynamic speaks again to the importance of analysis and information management as a component of the SCM solution. It’s one thing for supplier development and functional stakeholders to identify “soft cost” improvements and administrative efficiencies, it’s quite another to be able to quantify the value of those improvements to make finance agree to count them as savings.

It goes without saying that many of the improvements identified and implemented by the SCM team will result in hard dollar savings. Since others will not, SCM professionals will need to have a firm grip on market conditions, benchmark sources and contributing factors to total cost of ownership in order to avoid missing the value of major non-piece price savings.

Involvement with the c-suite has to go beyond convincing them to reconsider their approach to evaluating savings calculations; it also means demonstrating the importance of having SCM involved in their planning and measurement cycles.

Today, in many instances, the functional lead plans, procurement executes, and the CFO measures. The system is inherently flawed because so much of the knowledge resident in the organization is not being applied to key aspects of the process. For example, how can a CFO be expected to provide the function with a meaningful budget if they do not know what cost reductions SCM might be able to provide?  

This important element of successful SCM means an effort at silo-busting that is often discussed but rarely implemented. The new generation of procurement will be a much more sophisticated and impactful approach than previous iterations of strategic procurement, and their involvement in planning and measurement should be more obvious to both the function and corporate leaders.

Impact and Conclusions
Expanding the Scope of Procurement
While procurement is the only function within most companies primarily tasked with saving money, it is far from being their only task. Spend managers are also responsible for MWBE and related initiatives, Sarbanes-Oxley compliance, reducing the carbon footprint, and a number of other key corporate initiatives.

Unfortunately, the traditional model of sell to functional stakeholders and source categories does not lend itself to pursuing these strategic projects; SCM, on the other hand, does.

At its core, strategic category management is focused on knowledge. It means earning a deep understanding of categories, housing that information in an accessible and refreshable format and leveraging the knowledge to make meaningful changes to a company’s bottom line. This type of approach positions practitioners to not only create savings, but also to understand and impact issues of regulatory compliance and other issues that fall on procurement’s shoulders.

At the same time, the majority of these efforts will be aimed at tackling the savings issues that lie beyond the reach of strategic sourcing methods. The fruit at the top of the tree must also be harvested, and SCM will bring the kind of focus and skills necessary to reach those objectives.

By creating a mutually beneficial environment of continuous improvement with suppliers, savings can be achieved without sacrificing the strength of vendor relationships. In maintaining these relationships, the SCM approach helps to secure a corporation’s business by creating a consistent and lasting approach that protects service and delivery.

In Summary
Nothing lasts forever, nor should it. Just as strategic sourcing was right for its time and ultimately ran the course of its effectiveness, so will strategic category management.

For now, however, companies cannot afford more of the same and delaying a transition to a new mode of doing business is just that. In order to meet savings objectives in the future, increased sourcing activity will simply fall flat, regardless of the sophistication of the approach or the tools applied.

Instead, the application of knowledge, information management, and relationship management and development are the keys to success in the next generation of spend management.