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Webinar Notes: A Programmatic Approach to Sourcing: Delivering Real, Lasting Value
This week’s featured event was hosted by Sourcing Interests Group and featured two senior members of Denali Group’s team sharing their experiences with the use of strategic and non-strategic category sourcing to meet overall goals. The right balance of the two supported by an efficient balance of people, process, and technology opens the door to long-term value creation and impact within the organization. If procurement organizations are going to excel in today’s climate of scarce resources and high expectations, we need to explore every opportunity to the fullest. And of course the real goal of accomplishing all this is securing a voice for procurement in the strategic planning process of the company.
Chris Eyerman, Director of Program Management at Denali Group
Darshan Deshmukh, Vice President of Sourcing Services at Denali Group
What do we mean by lasting value in sourcing and procurement?
In this case, sustainable results are those that contribute to the profitability of the organization over the long term. Many teams face the challenge of ‘organizational entropy’ or “the inevitable deterioration of something left unattended” (Chris Eyerman). Management teams have the expectation that savings negotiated by procurement will be sustainable and that they will clearly materialize in a financially measurable form. In addition to the difficulty of tracking savings through to the bottom line, procurement organizations also challenges of knowledge management through employee loss.
A typical organization’s spend profile includes two major types of spend:
- Strategic: traditionally the initial focus of an organization putting a sourcing program in place. This spend is considered ‘low hanging fruit’ and can be managed through partnered suppliers or new suppliers, often with an average savings of 7-10%.
Non-strategic: high transaction count but low value spend, sometimes referred to as ‘tail’ spend. When looking to management this spend, resource constraints are an issue and there are few strategic relationships or partnerships with suppliers to leverage. When managed, there is the opportunity of 10-15% savings, but the cost to achieve those savings is higher than with strategic spend. Non-strategic spend is often managed by the end user/consumer who is trying to do the right thing by the company but does not have the skills or big picture understanding required to make efficient decisions.
Managing Non-Strategic Spend through Category Management
After the low hanging fruit has been managed, the next step in the maturity curve of an organization is to establish a category management framework and approach that taps into the value of non-strategic spend. Multiple strategies are required to address this pool of spend, which historically has often not been centrally managed by the procurement organization. Although there are challenges to overcome, this represents a significant opportunity. Category management combines internal business leads by spend category with the dynamics os external supply markets.
Rationalizing the supply base of non-strategic spend on an ongoing basis is one way to generate value. The fragmentation of this spend makes it harder to get visibility, but approaches such as. contract mining provide another source of data. The work may be slow going, but can be streamlined and generates good intelligence. Procurement needs to set up systematic, scalable processes that capture information over a long time for non-strategic spend. Having transaction level leverage is the key to managing this spend efficiently – not slowing down the purchase process. A significant portion of the information about these non-strategic categories comes from stakeholders, and so their support and assistance is critical to success.
When resources are a constraint for an organization trying to manage non-strategic spend, the company needs to have an ROI conversation with leadership. Sometimes outsourced providers are the solution, but it is important to start by assessing the corporate appetite for third party involvement. When establishing annual targets for the procurement group, build any anticipated usage of third parties (and the associated benefits) into the plan.
The Role of Spend Maturity
When assessing the maturity of any spend under management, start by considering the characteristics of the spend and whether there is an active strategy in place. The way the spend is managed has more to do with advancing maturity than the length of time the spend has been ‘under management’. It is possible to be ‘managing spend for a long time but in a tactical way, which does not count as mature management. Is there a supply base to support the spend? Have the suppliers been rationalized and is there stakeholder alignment?
The common elements of every best-in-class sourcing program are:
- Efficient, well-defined and documented processes that support quality, repeatable sourcing projects
- Strong executive sponsorship
- Aggressive and measurable (but achievable) goals, that are managed closely and tied to the organizations goals
- Resources and skills are aligned with the work at hand, driving efficiency through program structure. These resources should be aligned with spend categories. All tactical or transactional work should be a separate part of the team
- A customer centric approach
- Active communication and marketing that result in awareness of capabilities and successes
Most procurement organizations have the capabilities they need to be successful, but it is also important to be a healthy team to tap into that resource and leverage it. Trust and productive conflict lead to visibility and clarity (clarity of task, clarity of purpose). Team members need to be open and honest. Communication beyond the team members is part of program building. For more on building effective teams, Chris Eyerman recommends ‘Death by Meeting’ by Patrick Lencioni.