Executive Briefings

Three Steps to Whipping Your Sourcing Program Into Shape

There are more silos in corporate offices than on American farms. Of course I'm talking about the invisible kind: the ones that prevent sales from talking to finance, and logistics from talking to procurement. In a worst-case scenario (and one that's all too common), these various disciplines make a point of not interacting. You know that marketing guy down the hall who doesn't understand how your production plan really works? He's the enemy.

Same goes for the way in which many companies handle strategic sourcing, and they pay a heavy price for it. An organization whose managers don't share intelligence about suppliers and raw materials at one end, and actual sales at the other, is throwing away the chance to save money while doing a better job of matching supply with demand. But it doesn't have to be that way. Jim Wetekamp, senior vice president of solution strategy with BravoSolution (www.bravosolution.com), recommends a three-pronged plan for improving the management of strategic sourcing.

First, says Wetekamp, focus on the up-front sourcing process. Many procurement budgets are oriented toward historical spend and take an exclusively financial approach to the discipline. But companies can do a better job of estimating their needs by tracking the actual process more closely. Consider such elements as incoming demand for each product category, and the expected degree of price fluctuation. Examine a variety of scenarios and assess the probability and risk of each one. Armed with the proper information, purchasers can build flexibility into their contracts with suppliers, and realize price savings at the same time.

Second is the need for strict measurement of compliance with supplier contracts and commitments, both internally and externally. The best-laid contracts are meaningless if the parties don't stick to their terms. Are all of your business units procuring against the dictates of the agreement, using only anointed suppliers? Are you receiving negotiated volumes under the proper payment terms? Are service-level agreements and product quality guidelines being upheld to the letter? Precious working capital can be maximized by hunting down the gaps between contract price and the figure on the invoice, says Wetekamp. But it takes a well-structured agreement to make such insights possible.

Third is the question of unaddressed spend. Are all of your sourcing requirements being covered in your supplier contracts? Do you have your hands on the data necessary to work across vendors and product categories? Can you easily discuss issues such as market share within given categories, and price discrepancies among like items?

Some industries are doing a better job of following Wetekamp's advice than others. Healthcare is especially good at enforcing compliance with supplier contracts, he says. Purchasing organizations in that area do a relatively good job of specifying key suppliers and controlling corporate spending habits. (Too bad their success hasn't done much for controlling overall healthcare costs.) Other sectors such as consumer packaged goods producers are beginning to focus on the up-front forecasting process, wherein they can capture savings through more rigorous negotiations with suppliers.

Of course, the whole effort tends to break down as a company ventures up the tiers of its supplier base. Second- and third-tier vendors tend to lack the sophistication or market savvy of primary suppliers. Often they can't furnish the raw data that's needed to assess their ability to meet volume targets. But not every relationship has to be of equal depth. Wetekamp advises clients to "bucket" suppliers according to the type of relationship - in other words, which ones require a high level of collaboration due to the complexity or importance of components, and which are based on standardized commodities.

Crucial forecasting data comes from commodity managers, who are the drivers behind any strategic sourcing process. They can help to determine where savings can be achieved along the way. They also play a key role in assessing vendor compliance.

But they can't do it alone. It's not that common for commodity managers to interact to interact with sales people on a real-time basis, Wetekamp says, but a company will never optimize its strategic sourcing effort until they do. In fact, he recommends that the sourcing effort be designed much like a traditional sale process, with commodity managers given performance targets along with the measurements needed to ensure they're being met.

All of this sounds like it should eat up valuable time and resources, through the need for painstaking documentation and process definition. Over-extended category managers might call it something else: busywork. In fact, says Wetekamp, the opposite is true. By crafting well-structured sourcing programs with hard, consistent performance metrics, and by taking a holistic view of corporate spend, companies can redirect the energy "that's already getting burned and wasted." And save quite a bit of money in the process.

Comment on This Article

There are more silos in corporate offices than on American farms. Of course I'm talking about the invisible kind: the ones that prevent sales from talking to finance, and logistics from talking to procurement. In a worst-case scenario (and one that's all too common), these various disciplines make a point of not interacting. You know that marketing guy down the hall who doesn't understand how your production plan really works? He's the enemy.

Same goes for the way in which many companies handle strategic sourcing, and they pay a heavy price for it. An organization whose managers don't share intelligence about suppliers and raw materials at one end, and actual sales at the other, is throwing away the chance to save money while doing a better job of matching supply with demand. But it doesn't have to be that way. Jim Wetekamp, senior vice president of solution strategy with BravoSolution (www.bravosolution.com), recommends a three-pronged plan for improving the management of strategic sourcing.

First, says Wetekamp, focus on the up-front sourcing process. Many procurement budgets are oriented toward historical spend and take an exclusively financial approach to the discipline. But companies can do a better job of estimating their needs by tracking the actual process more closely. Consider such elements as incoming demand for each product category, and the expected degree of price fluctuation. Examine a variety of scenarios and assess the probability and risk of each one. Armed with the proper information, purchasers can build flexibility into their contracts with suppliers, and realize price savings at the same time.

Second is the need for strict measurement of compliance with supplier contracts and commitments, both internally and externally. The best-laid contracts are meaningless if the parties don't stick to their terms. Are all of your business units procuring against the dictates of the agreement, using only anointed suppliers? Are you receiving negotiated volumes under the proper payment terms? Are service-level agreements and product quality guidelines being upheld to the letter? Precious working capital can be maximized by hunting down the gaps between contract price and the figure on the invoice, says Wetekamp. But it takes a well-structured agreement to make such insights possible.

Third is the question of unaddressed spend. Are all of your sourcing requirements being covered in your supplier contracts? Do you have your hands on the data necessary to work across vendors and product categories? Can you easily discuss issues such as market share within given categories, and price discrepancies among like items?

Some industries are doing a better job of following Wetekamp's advice than others. Healthcare is especially good at enforcing compliance with supplier contracts, he says. Purchasing organizations in that area do a relatively good job of specifying key suppliers and controlling corporate spending habits. (Too bad their success hasn't done much for controlling overall healthcare costs.) Other sectors such as consumer packaged goods producers are beginning to focus on the up-front forecasting process, wherein they can capture savings through more rigorous negotiations with suppliers.

Of course, the whole effort tends to break down as a company ventures up the tiers of its supplier base. Second- and third-tier vendors tend to lack the sophistication or market savvy of primary suppliers. Often they can't furnish the raw data that's needed to assess their ability to meet volume targets. But not every relationship has to be of equal depth. Wetekamp advises clients to "bucket" suppliers according to the type of relationship - in other words, which ones require a high level of collaboration due to the complexity or importance of components, and which are based on standardized commodities.

Crucial forecasting data comes from commodity managers, who are the drivers behind any strategic sourcing process. They can help to determine where savings can be achieved along the way. They also play a key role in assessing vendor compliance.

But they can't do it alone. It's not that common for commodity managers to interact to interact with sales people on a real-time basis, Wetekamp says, but a company will never optimize its strategic sourcing effort until they do. In fact, he recommends that the sourcing effort be designed much like a traditional sale process, with commodity managers given performance targets along with the measurements needed to ensure they're being met.

All of this sounds like it should eat up valuable time and resources, through the need for painstaking documentation and process definition. Over-extended category managers might call it something else: busywork. In fact, says Wetekamp, the opposite is true. By crafting well-structured sourcing programs with hard, consistent performance metrics, and by taking a holistic view of corporate spend, companies can redirect the energy "that's already getting burned and wasted." And save quite a bit of money in the process.

Comment on This Article