Sourcing Value: What is it and how do you find it?
What value have you created for me today?
Some form of that question is asked or implied each day in the corporate world. Creating value is a sourcing person’s primary responsibility. It should focus your attention – where can maximum value be generated; where is high risk; what can I do about it.
So how do you capture this value?
Unfortunately, there is no easy answer but focus and diligence can get you there. This is not an area where you can wave the magic wand of technology and voila your value shows up in the bottom line, though many technology providers will have you believe this is what their software does.
In my experience, value opportunities are discovered by combining a thoughtful approach with expertise and rigor. There is low hanging fruit, for example, you bid out a large contract, negotiate prices and deliver savings. That’s impactful and straightforward. What happens once you have extracted savings from the obvious spend categories?
The discussion on sourcing value ebbs and flows with time and economic environment. Mature sourcing organizations stay true to a broad definition of value even during challenging economic times. Though in many instances, when margins are under pressure the CEO will turn to the CPO to reduce supply costs. It seems like we can’t do much about selling prices of the goods or services we produce (or so we say), and we want to avoid cutting staff costs because that’s too close to home. Sure, we can cut costs thru process improvements, but they are hard and take time. The logical targets are third parties – suppliers and contractors. Reduce the cost of inputs by $1 and it will flow straight to the bottom line. It’s the cold reality of business.
There was a time when sourcing value was narrowly defined as negotiating lower prices by beating up suppliers. Mature sourcing teams would push on payment terms as well. Sourcing world was simple then. While savings is still a key component, the definition of sourcing value has expanded beyond it.
Defining sourcing value
We can debate ad nauseum about its scope. I will describe an expansive view of value. You can include a part or all of it in your definition. It is more important that key stakeholders particularly the CEO, CFO and business units agree with your definition. Without this agreement you will waste countless hours debating what is included, and reconciling numbers or worse, justifying your function’s existence. So, here is my list:
Price reduction – year over year price reduction
Terms improvement – extend payment terms (without any offsetting price increase)
Annual rebate
Cost of quality (# of defects, # of returns, etc.)
Delivery to promise
Inventory carrying cost (alternatively stock out costs)
Cost avoidance, for example when your negotiated price changes by less than a market index, or when you are buying a product for the first time and no previous purchase price exists. Be warned, including cost avoidance is like waving a red flag in front of the pedigreed sourcing bull.
Sourcing efficiency – speed to do RFX’s, request to contract time, spend managed per FTE, # of suppliers managed per FTE
The more expansive your definition of value, the more effort you will expend to track and report it. Early in my sourcing career I reported on inflation/deflation in the purchase of IT. We had developed complex spreadsheets for this, and it took a week each month to prepare the report. I did not feel very fulfilled doing it. In my view a lot of companies spend too much time and resources to track, report, reconcile, and explain the value that sourcing has generated. While it is an essential activity, it needs to be tightly managed. Initially, spreadsheets will be adequate; however, as the maturity of this activity increases, you should consider an automated tool set. Your guiding principle should be “keep it simple”.
Uncovering sourcing opportunities
I have found a structured methodology to be useful. Here is a simple framework.
Step 1: Gather information
This information is foundational. You can start to compile this information for a category or even a product and later expand it.
Business strategy - Understand business strategy (is it differentiated product or low cost), internal customers’ objectives and pain points
Organizational goals and metrics - What are your goals (Savings, terms improvement, quality improvement, supply assurance, innovation, process efficiency)?
Spend analytics and category strategies - by Category, Supplier, Region, Business unit, plant and product
Summary of major contracts – commercial terms, technical specifications, service levels
Sourcing processes and technology landscape – process maps, approval levels, technology map
Spend analytics technology and services can be useful and are provided by SAP BI, Cognos, Tableau, Sievo (www.sievo.com), and SpendHQ (SpendHQ - Spend Analysis Software | SpendHQ) to name a few. The challenge will come in the level of detail that your systems are set up to capture, and data integrity. Master data management and data governance which form the building blocks of data integrity are topics for another day.
Step 2: Develop insights and ideas
Creative thinking, expertise, and the ability to connect dots determine the quality of output. Be creative in crafting solutions and challenging legacy views. For example,
Is your material specification so tight that you are paying a premium but which you are unable to recover in your selling price?
Can you negotiate a lower price with a software provider to pay for only functionality you will use?
Are your tolerances so wide that the supplier is meeting SLAs but your users are still complaining about quality?
These steps will enable you to develop such insights.
Create a value stream map of your supply chain
Assess alignment of sourcing strategy with business strategy
Know your operations and material flows
Evaluate your specifications, and fitness for use
Evaluate category plans and sourcing strategies
Segment your suppliers
Look for spend consolidation opportunities
Examine commercial terms
Explore supplier relationship, risk, and co-innovation possibilities
Step 3: Identify opportunities
Strategy is about aligning your objectives with your resources. This is where you filter down from ideas to the opportunities you can meaningfully pursue.
Select them based on impact – dollars and risk are the most compelling arguments in focusing attention and resources.
Quick wins are more desirable than multiyear projects. I have seen well intentioned multiyear projects fail because sponsors move on, and priorities change. Here are some opportunities to consider.
Renegotiate prices and payment terms
Consolidate supply base
Improve supplier performance levels
Improve product quality
Explore supplier and product substitution
Develop a supplier risk mitigation plan
Step 4: Implement & govern
You must ensure that your senior stakeholders agree with your shortlist of opportunities and agree to commit personal time and their resources to the projects.
Secure executive sponsorship and establish a formal governance structure so that your teams’ wins are visible and obstacles in executing are removed.
Rank opportunities; secure alignment and resources
Form project teams and develop project plans
Establish a governance structure and reporting cadence
Execute projects
Step 5: Deliver results
Provide frequent updates. Track and report your results. Keep reports and calculation methodologies simple.
Ensure that finance and operations agree with the numbers you report.
Report on delivered results
Collect a well-deserved bonus!!
Some will balk at this framework as “bureaucratic”. To those naysayers, I say, without a structured approach and commitment to opportunity creation, you will only uncover occasional flashes in the pan. However, it is important to remember that the structure is a toolset to achieve organizational goals and not an end in itself.
Final word.
Uncovering value is Sourcing’s raison d’etre. If you consistently follow a structured approach, it will become the way you operate, and you will create a learning organization that continually delivers value.
We are seeing a growing interest in using technology to do more sourcing activities. This effort will accelerate in the future and change the role of the sourcing human. The way to stay relevant is to move up the value chain of sourcing activities.
If you have comments, questions, or suggestions click on the button below or email me at kkannan@procuralservices.com :
Thank you for subscribing to my newsletter by clicking on the button below: