Buyers Eye Strategic Sourcing as Viable Procurement Strategy

Oct. 5, 2016
Buyers are more focused than ever on reducing costs while delivering new levels of value to their companies.

If the results of Deloitte’s most recent survey of chief procurement officers (CPOs) is any indication, buyers are more focused than ever on reducing costs while delivering new levels of value to their companies. In fact, according to The Deloitte Global CPO Survey 2016, which explores the current status and future prospects for procurement, most buyers right now have set their sights on “aggressive cost control wrapped in risk protection.”

According to Deloitte, 43% of CPOs are looking to consolidate spend, 39% want to increase the level of supplier collaboration, 31% would like to help restructure existing relationships, and 30% want to reduce total life cycle ownership costs—all with an eye on generating more value for their organizations.

Demand for impactful procurement continues to run high, both in terms of managing cost as well as unleashing the potential of the supply market to differentiate business performance, Deloitte reports. However, the traditional constraints of manpower, expertise, and policy driven process are inhibiting.

Cycle times need to be shorter, insight needs to be richer and more agile, and performance needs to be more transparent and efficient.

“For many years, procurement organizations set their sights on cost, specifically cost reduction,” writes Ronnie Garrett in Supply & Demand Chain Executive’s Set Your Sights on Strategic Sourcing. “They found their mark—and their value—in unearthing ways to reduce expenses related to direct and indirect purchases of goods and services.”

Is Strategic Sourcing the Answer?

In the S&DCE article, Garrett points out that more and more buyers are zeroing in on a practice called strategic sourcing, which Mukund Acharya, vice president of GEP, a procurement and supply chain consultancy, said is simply a “data- and fact-driven exercise that looks to maximize not just the savings options but the total cost of ownership.”

Defined as an organized and collaborative approach to leveraging targeted spend across locations with select suppliers that are best suited to create knowledge and value in the customer-supplier interface, strategic sourcing incorporates important points like total historic expenditure and purchase volumes, categorized expenditures (by commodity and sub-commodity, for example), expenditure by supplier, expenditure by division/department, and future demand.

With strategic sourcing, procurement organizations are aiming at a new way of doing things, and in some cases that requires knowing the categories of spend within the organization and “then clustering and coding that spend to get the biggest bang for the company’s buck,” Garrett writes. On the direct materials side, it may be purchases for anything from resins to glass to electronics components. The spend on the indirect side on the other hand, is more decentralized and it might be anything from IT to business services to facility spend.  

Getting Through the Stumbling Blocks

As more electronics buyers look at strategic sourcing as a viable option, it’s important to note that it does come with its own set of challenges. One of the biggest barriers, for example, is the misalignment between how the procurement function measures cost savings and how the business measures profit and loss (P&L).

“Traditional procurement cost savings is based on a comparative year-over-year or transaction-over-transaction analysis focused on total cost reduction,” said Bill Huber, Alsbridge’s managing director, in the article. “Very few procurement organizations add the value of capability differentiation to their financial calculations, so the primary key performance indicator (KPI) for most procurement organizations is related to its impact against static requirements.”

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About the Author

Bridget McCrea | Contributing Writer | Supply Chain Connect

Bridget McCrea is a freelance writer who covers business and technology for various publications.