Getting sourcing right
Its evident that getting sourcing right, will contribute to an organisations P/L as well as enable an organisation to deliver the right products and services to the market at the right time and so bring both tangible and intangible value to the company’s business and strategy. Therfore, it’s increasingly vital to consider the design of the sourcing organisation in order to enable innovation and technology development as well as support ongoing business activities.
By getting sourcing right studies indicates that organisation can reduce costs by 10-15%, at the same time simplify and improve employee productivity with hours as well as gain control and visibility of spend. It basically creates more clarity, transparency and such organisation attract good people.
How to get it right
Modern sourcing organisations are essentially designed by considering six elements, however, the industry and/or the nature of the organisations operations and its objectives will naturally influence the design set-up. Moreover, the size of the organisation will of course also influence souring set-up as well as purchasing power, however, most of the essential elements will be presents in one way or another regardless size.
Category Management is the core design element because categories are used as the way of defining what kinds of products and services a firm needs to buy in order for the company to deliver its offering.
Strategic Sourcing is another design element that is particularly important for companies that have a product centric offering. The purpose of the strategic sourcing function is to ensure that the right types of direct materials are supplied to the company’s production units, with appropriate indirect materials also supplied to support functions. Strategic sourcing often seeks framework agreements with qualified suppliers as a means of ensuring the company has suppliers that have the capacity to deliver what is needed, when it is needed.
Project Sourcing is an important design element for companies that use large scale investment projects as a means to deliver their offering. Often, project sourcing is used in complexed production related environment or for infrastructure investments. The project sourcing function assesses the strategic and operational requirements that the project has, and goes on to identify suppliers and shape suitable procurement contracts often together with a Project Management Office and engineering functions. These project sourcing functions need to work in close collaboration with other project participants and sourcing units for example Category Managers.
Operational Sourcing, sometimes called tactical sourcing, is another design element. Operational Sourcing addresses the handling of call off and smaller sourcing initiatives. Together with Sourcing-to-Pay, these functions need to focus on efficient operations related to placing orders, ensuring receiving goods and paying for goods and services, sometime in conjunction with finance departments. Such functions within the sourcing organization often also manage renewal of contracts in collaboration with other units.
Where sourcing is a significant cost for the organisation, the sourcing organisations may also choose to include a Process Unit or sometime called Operational Excellence Unit within the sourcing design. Such Units develop and ensure digitalization of processes, appropriate sourcing systems and tools. As well as and integration of other data system for example Account Payable, ERP and MPS systems in order to develop a seamless Sourcing to Pay to (S2P) solution be use across the company. These type of function is also vital for enabling financial follow up and performance and monitoring of sourcing activities such as handling of purchasing order, payment of invocing, savings, contracts etc.
A final component in the design of sourcing organizations may also be Supplier Relationships. This Unit can be important for developing the capabilities of suppliers in order to ensure i) the procurement of emerging technologies, ii) ensure year on year improvement in costs and quality and/or iii) when working in complex project deliveries or research and development initatives where eco-system perspectives are needed either for product innovation or for value engineering purposes.
Sourcing Execution
When the sourcing organisation is designed, the Governance Structure and tools for carrying out Souring Strategies need to be developed and adopted for it purpose. Alongside, this organisations need to considering recruiting the right business skills and development competence of personel in order to set standards that enables and organisations to reach objectives.
For the Governance Structure, its rather common that different types of council or boards is established both within the sourcing organisation. As well as external forums and boards for joint business planing with stakeholders and sometimes also with partners and major suppliers. In these forums collaboration, objectives balance scorecard related KPI boards etc is discussed in order to calibrate procurement performance.
For executions of Sourcing Strategies related activities there are several ”tool boxes” that can be applied and combined for deploying sourcing plan for a specific project or category opportunity. A very comprehensive and useful tools to tackle various sourcing challenges are the Purchasing Chessboard from 2008.
The Purchasing Chessboard offers 64 different methods and some key levers to reduce cost and to increase value with suppliers. Furthermore, the model also offers a business alignment tool for discussing how sourcing and business operation jointly can develop high-level principles for executing sourcing strategies, in order to shape efficiency and so contribute to an organisations objectives and P/L.
The model is based on experience from several different industries. Such as procurement of public procurment of military equipment, automobile manufacturing, construction equipment, energy & utility, to pharmaceutical and the the food industry. Meaning that there are most likely several adequate tools that buyers can applied that goes beyond quality, volume and the price tag.