Purchasing’s evolution to strategic sourcing is a multistage process

When considering the move from transactional purchasing to strategic sourcing and world-class supply management, while there is no sure-fire method for refining procurement processes, there is a five-step process that most companies pass through as they move their value propositions up into higher and higher levels.

The Hackett Group , an Atlanta-based consulting group, suggests a series of discrete stages that incorporate benchmarking, best practices, and corporate methodologies.

“We look at performance to see what separates companies, and why some are excelling,” says Pierre Mitchell, senior business advisor for The Hackett Group. “The evolutionary process is a journey that can take years, and each company is unique in how it moves through the stages.”

Stage 1 comprises traditional procurement, where agents launch purchase orders and buyers try to work on more strategic tasks while responding to a stream of expediting and tactical sourcing requests. “In this stage, there is more time spent buying than planning, and companies never get ahead of the game,” says Mitchell.

One way to move beyond Stage 1 is to clearly delineate strategic sourcing processes by forming cross-functional procurement committees.

Stage 2 separates execution from the supply planning role, while scheduling becomes more automated, and expediting is pushed down to the plant level. Moving to Stage 3 involves mastering the art and science of total cost, and this is where most large organizations struggle to gain alignment and commitment to this view, says Mitchell.

Cross-functional teams are formed during this stage for particular spend categories, looking at total landed costs—e.g., logistics, warehousing, and inventory strategies. The challenge is in forming cross-functional management through the life cycle of the spend category.

“Cross functional teams have been around for years, but they have truly only been sourcing teams and not supply teams,” says Mitchell. “There should be follow-through to ensure continuous improvement on the supply side.”

Another major challenge in Stage 3 is juggling fluctuating supply and demand. Companies not only need to form good sales and operations plans, but they also must look at how it will affect the supply base, says Mitchell.

Data from The Hackett Group suggests that even companies that are not world-class and are operating at Stage 2 and the early stages of Stage 3 of the procurement-to-strategic-sourcing evolution are still delivering meaningful savings, and those savings dwarf the investment in the procurement function that delivers these savings.

“Most companies don’t have a rigorous approach to forward-looking supply plans that consider forecasts and demand scenarios,” says Mitchell. “They have to ask, ‘How will this plan affect my suppliers? If this campaign takes off, can we handle the supply?’ It’s all about getting visibility into demand, understanding how it relates to supply, and being able to adjust either side.”

Mitchell says many companies tend to get stuck in Stage 3 because total cost is difficult to achieve. “Performance management is very important, and balanced scorecards should be applied from top to bottom,” he says.

A dedicated sourcing application such as Centric Product Sourcing from Centric Software can help global companies calculate total landed cost, which measures duties, taxes, shipping costs and product margins.

Perhaps the most challenging hurdle in reducing total cost of ownership (TCO) is a continued focus on short-term cost reductions at the expense of higher overall costs over the long term—an issue not just of leadership, but also of poor design.

“The solution allows organizations to compare private labels with branded equivalents to see if they can save money,” says Betsy Burgess, a senior director for Centric Software. “If a company can gain better visibility into landed costs and compare apples to apples, it can increase profitability.”

Centric’s product intelligence system also tracks supplier performance risk metrics that can dramatically affect a company’s bottom line.

“Most companies track operational metrics like delivery time, but fail to collect data about what percentage of revenue is dependent on a certain supplier,” says Burgess. “If something were to go wrong with a supplier that is responsible for 25 percent of a manufacturer’s product line, it can seriously impact revenue.”

Likewise, the scenario could go the opposite way, notes Burgess. “If a supplier is dependent on a manufacturer for a high percentage of revenue, and the manufacturer suddenly decides to cut the product line, the supplier could go out of business,” she says.

This dilemma played out last summer with the lead paint controversy, which affected hundreds of business partners.

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