Webinar Notes: Practical Steps to Strategic Sourcing
This week’s featured webinar was presented by CPO Agenda: ‘Practical Steps to Strategic Sourcing’. Their selection of this topic has interesting timing, as Strategic Sourcing was just crowned as the ‘champion’ in the CPO Rising March Madness tournament.
Most of the advice in the event centered around approaching a sourcing strategy from a practical perspective starting with the handling of spend data. For instance, there is more to a company’s spend than what shows up in AP, such as wire transfers, purchasing cards, etc. Anyone that has been through a spend analysis implementation knows about the challenges and benefits of merging data sets. The value of visibility comes from being able to see purchasing activity across systems.
The object of managing your spend is to create competitive leverage. Supplier rationalization is not enough. It is also important to validate how much you spend with which suppliers and why. Understanding the corporate ownership structure of your supply base (such as when subsidiaries look like independent companies) will affect the invitation list for bidding opportunities.
Managing Spend by the 80/20 Rule
When trying to bring a large pool of spend under management, one of the most frequently used approaches is the “80/20 rule”, also known as the Pareto Principle. While it is true that roughly 20 percent of your suppliers will represent 80 percent of your spend, this still leaves a dangerous proportion of spend and transactions unmanaged, and can be a matter of perspective. For instance, do you draw your 80/20 split line based on spend or transaction count? Are you trying to address leakage based on categories or contracts? How you apply the rule changes which suppliers and transactions are affected.
In the Q&A portion of the webinar, one of the participants asked how you can realistically manage more than 80 percent of spend without additional resources or a narrowed scope of responsibility. The answer was a reminder to apply the rule while also keeping your priorities aligned with corporate and organizational objectives. For instance, if you are tasked with maximizing contract compliance, you may be missing significant opportunities to roll small supplier spend into existing contracts by taking an 80/20 approach. Regardless of what spend/suppliers/transactions you end up addressing, the key is to continue looking at 100 percent of your spend.
Another of the areas of focus from the event was on how you categorize your transactions so that the information is actionable. This happens to be one of my favorite areas of spend analysis as applied through strategic sourcing, and I thought the advice given was sound.
The first question to be settled is exactly what you classify. While multiple pieces of information about each transaction (supplier, supplier location, general ledger code, etc) may be used to categorize that spend, it is important to assign category data at the right level. Classify the purchase not the supplier or general ledger account to allow for diversity of business with one supplier or department. When categorizing suppliers rather than items, other services inadvertently get rolled in. This approach is also based on the oversimplification that each supplier only sells you one category of solution.
Make sure you have sufficient depth in your category structure: a label like ‘office supplies’ is not detailed enough. Keep in mind that it is more important to know WHAT was purchased than WHY it was purchased. The commonly applied UNSPSC taxonomy (United Nations Standard Product and Service Classification system) may fail you, particularly in your company’s area of deep expertise. As one of the webinar speakers noted, UNSPSC offers 15 kinds of fish, but may not have a deep structure around the technical products and services you regularly purchase.
Visibility and Validation
After you have completed the data cleansing process for spend analysis, have it validated by category experts in your company to see if further cleansing is needed. Monthly data refreshes will allow you to uncover trends, anomalies, compliance problems and react to them immediately.
Establish a cross-functional spend management strategy inside your company. All groups need to contribute to spend management activity and should also benefit from the work done. Unify the company behind the procurement or sourcing strategy, and align objectives across departments/individuals by defining clear roles and responsibilities at the task level.
This additional contact with category experts will help procurement better understand current supplier relationships. We can then define what the business is doing relative to the forward looking objectives that everyone involved in spend management activities has been tasked with accomplishing. As each category is approached, collect market intelligence about the current supply base as well as general market trends. Set goals and prioritize projects for each category with metrics that tie the results to those goals.
- Consider 100% of your spend
- Understand the market dynamics of your supply base
- Classify transactions to support both tactical and strategic work
Purchasing activity is the largest single use of funds a company has – and we are the only function in the company where one currency unit’s change (such as a savings of $1) results in the same amount as a net positive outcome.