This week's eSourcing Wiki-Wednesday topic is 'Sourcing Success Enablers'. An excerpt of the article is below, but you can also read the full article on the eSourcing Wiki by clicking here. Have something to add? The eSourcing Wiki is an open content community and you are invited to register and contribute to this resource, which benefits our whole professional community.
If you are interested in reading more about how to put the strategic back in sourcing (or if you were the kind of kid that insisted on coloring outside the lines), don't miss today's post on The Point: "Strategically Source Everything. Period."
"Almost 50% of best-in class enterprises that source strategically using best practice strategic sourcing techniques use commercially available e-sourcing solutions."
From: Strategic Sourcing in the Mid-Market Benchmark:
The Echo Boom in Supply Management, Aberdeen Group, December 2005
After identifying some key barriers to success, it is now important to understand how an organization can minimize the effect of these barriers. Fortunately there are many success enablers to help organizations effectively meet business goals. Success enablers fall into two broad categories:
Process enablers (best practices): help companies procedurally overcome barriers and accomplish goals.
Technology enablers: help companies leverage technology to overcome barriers, enhance best practices and accomplish goals.
As with the list of barriers to success, this is not necessarily a complete list of every best practice, but a prioritized list of major process enablers that Iasta has found to be effective. Process enablers/best practices fall into three categories:
Organizational best practices are designed for the macro level - to cement the proper perspectives and processes across the organization and ensure that the proper strategic elements of supply chain management and sourcing are addressed.
Enlist senior-level executive support: Enlist and ensure continuous executive support at all senior levels. This is extremely important so as to fund resources and enforce policy changes required for success. It also deters intra-company battles for ultimate sourcing responsibility. In addition, the executive team should agree on common processes and goals as well as encourage collaboration across all teams.
Form a dedicated team: Form a dedicated strategic Sourcing Team, lead by a senior officer (example, Chief Purchasing Officer, CPO) who follows generally accepted project management principles (such as the PMBOK from PMI) and processes (such as Six Sigma) to manage the complexity. Truly successful strategic sourcing projects are never done on an ad-hoc or stand-alone (after-thought) project basis. The CPO, part of the senior management team, ensures proper visibility and support of the team. It is also important that the CPO be a strong, vocal proponent that draws attention to the many opportunities good sourcing processes bring organizations.
Adopt a company-wide supply chain focus: Organizations that excel in strategic sourcing have adopted, developed, and enforced best-in-class strategic sourcing procedures across the organization. These sourcing procedures are consistent with an overarching "destination" supply chain design. With a continual focus on process improvement, these organizations often develop formal, multi-year plans to project, audit, and validate savings.
In addition, they align goals across the different business units of the corporation and have centrally controlled spend strategies through sourcing centers of excellence.
As part of a supply chain focus, successful companies do not overlook indirect categories. Chances are some categories (such as office equipment, professional services, etc.) consume a significant part of the total organizational spend and will also benefit from a review. Strategically source everything. (Often strategic sourcing means outsourcing procurement of non-critical, low value spend, or commodity categories to external organizations that also follow strategic sourcing principles.)
Focus on compliance: Companies lose large amounts of money through leakage - stakeholders do not order from the correct vendor (often called maverick spending), new pricing is not universally rolled out, etc. Successful organizations align processes, systems, and incentives to ensure compliance with sourcing plans and adopt procedures, systems, and metrics to measure internal and external performance.
After establishing the right organizational outlook, companies need to develop supply chain and commodity (category) sourcing strategies. As with any effort of merit, this is easier said than done. However, the right processes and practices can greatly simplify the job.
- Acquire the expertise
Locate and hire sourcing and commodity expertise for major spend categories. Hire experienced personnel and use consultants to augment and mentor in house capabilities. Constantly seek to validate and improve knowledge, methods, and capabilities at every opportunity.
- Engage stakeholders
Engage all relevant stakeholders throughout the organization for each appropriate spend category in sourcing strategy development and constraint identification (used to determine award scenarios). Activities include:
- Outlining Sourcing Team goals
- Defining requirements
- Determining timeframes
- Communicating to both internal stakeholders and external suppliers and partners
Companies should establish a communication channel for relaying information about strategies and results. Vagueness lengthens sourcing cycles, induces suboptimal award decisions, and strains internal and external relationships. Moreover, a lack of clarity and transparency fail to convey critical processes and roles. Goals and objectives should be cross-team and processes should involve all relevant business units.
Corporate spending and demand forecasts should be accessible to all stakeholders, as should related analyses and analysis tools. Sales, marketing, production, logistics, and even partners should all be working from the same numbers.
- Encourage supplier innovation
Support supplier creativity through:
- Flexible bidding methods with advanced cost models
- Category strategies for future cost reductions in key categories
- Strategic relationships
Innovative suppliers improve processes and find new savings opportunities. A strong supply base focus is a key to success.
- Evaluate alternatives that focus on quality and supply assurance
To better understand what a business rule, business requirement or business practice costs, remember to evaluate constrained and unconstrained alternatives. There may be alternatives that focus on supply assurance, quality and TVM - not just the acquisition price.
- Develop meaningful performance incentives
People are the most important part of any supply chain. Offer appropriate financial rewards based on TVM-based metrics based on measurable goals and objectives.
Good strategy is a great start. But a strategy must be properly implemented to produce the desired effects:
Use Decision Analytics Up Front
Use advanced decision analytics up front to address sourcing strategies, demand management, and initial product design where as much as 80% of the final product costs are locked in. These tools should support flexible bidding and allow for realistic comparisons on otherwise "apples to oranges" comparisons through appropriate weightings, metrics, and transformations. Accurate, relevant data is a key factor in building decision analytic models and forces the team to focus on quality up front.
Know Your SMOCS (Suppliers, Market, Opportunities, Customers, and Spend)
Pre-qualify all suppliers before accepting bids or outlining award allocations. Make sure they can deliver high quality products based on the company's needs - what, when, how and where. Also important, knowing what are the primary demand triggers of the market. What does the end consumer want? What effect does this have on quality, time-to-market requirements and sourcing cycle time? What are past consumption levels; over what timeframe? How does this affect demand and the next sourcing cycle?
Companies need to be proactive about predicting and managing change so surprises are minimized. Unexpected turbulence significantly increases spend costs. Inaccurate or outdated data also affects future spend costs. Data must be reviewed and refreshed throughout the link on the supply chain. Sourcing Team's also need to identify opportunities for improvement that include alternative products, potential improvement targets, cost savings, and costs associated with the specific business requirements and constraints.
Use e-Sourcing Tools
E-Sourcing tools combine the "art" (cost models, supply market knowledge, and constraint analysis) with "science" (collaboration and analytics). The tools, based on standard processes and workflows, decrease cycle time, eliminate errors, and increase the overall result quality for strategic sourcing projects. E-Sourcing tools support collaboration and allow various stakeholders to easily work together. Include training for each system and business process to maximize success.
Select the Right Mix of Software and Services
Strategic sourcing requires the right blend of software and support services to help the Sourcing Team select the best strategy, set of tools and methodologies. Use both complementary product and service solutions, centered on common processes, to achieve maximum returns in strategic sourcing efforts. The balance of software to services should change over time as the Sourcing Team evolves and technology improves. The correct balance depends on many issues facing the company.
- Some teams may require more support services as they start using e-Sourcing tools for the first time, then reduce the reliance on those services as they gain experience.
- Some teams completely outsource entire categories, such as indirect materials, and standardize on one sourcing platform.
- Some teams rely on service providers to augment the team based on expertise and/or number of projects to be completed.
- Some teams simply standardize on a sourcing platform and completely self-support.
Define appropriately aligned metrics for assessing results for spend categories. Apply and update the metrics on a regular basis. Look for total cost productivity opportunities such as increased capacity utilization, more efficient production or delivery processes, and alternative lot sizes or order quantities in the constant quest for quality improvement. For example,
- Rate Reduction
net reduction in prices paid for items procured when compared to prices in place for the prior 12 months [old price - new price] * volume
- Demand Reduction
measures the result of a proactive program to reduce usage [volume reduction] * price
- Compliance Improvement
the improvement in contract compliance from 12 months ago [current compliance rate] - [prior compliance rate]
- Engineering & Specification Improvement
the result of a proactive program to change the manufacturing product specifications and design to reduce costs [old bill of materials - new bill of materials] * volume
Develop a process-centric focus
Continually look for ways to improve processes. A process works until it doesn't. This applies to sourcing processes. A process may not work because technology advances replaced the process (example, collecting fax-based bids vs. an auction). A process may not work because the market has changed (example, the introduction of Sarbanes Oxley). A process may not work because the company has changed (example, a division has been bought or a sold). Regardless, just like product specifications, business processes must be fresh to ensure quality decisions. Each project has learnings that potentially can be applied to global sourcing processes - whether it was a successful project, or unsuccessful project. Take the time to review projects and apply the learnings so the entire business can benefit from better decisions.
eSourcingWiki is an open content community of strategic sourcing and procurement best practices. This wiki is intended to be a dynamic document that constantly adjusts and transforms to current trends and thought leadership in supply management. Iasta welcomes global contributors to assist in the ongoing documentation and knowledge building that is essential to creating useful information for supply management professionals.