By Kris Colby, Senior Vice President - Commercial, FedBid, Inc.
Five lessons for getting more results from your sourcing efforts without reinventing the wheel
Regardless of the economic climate, savings always ranks at the very top of the list among the priorities of procurement professionals. The pendulum may swing from supply risk during a recession, to talent acquisition and commodity pricing during a boom period, but savings are always the number one goal as evidenced in a recent CPO Agenda report.
Over the past fifteen-plus years, strategic sourcing, eSourcing, rapid sourcing and a host of other cost/spend analysis/management approaches have been used with great success by organizations and companies trying to save money. Nearly all large organizations have implemented some version of structured sourcing on at least a portion of their spend.
In addition, sourcing technologies are widely available with an estimated 75% of large organizations having access to eSourcing applications.
When done correctly, focused sourcing initiatives have proven to generate substantial savings (an average of 12-20% identified savings by most estimates), increase efficiency of procurement departments, and improve service, quality and responsiveness from suppliers.
Given the proven success of strategic sourcing and the continuing need for savings, it is surprising that the vast majority of organizations have not implemented some form of strategic sourcing broadly across all spend. Why would this be the case? Blame the hurdles; challenges that hinder the widespread adoption of disciplined sourcing, such as:
Lack of resources in procurement departments
Distributed spend ownership
Incomplete training and change management
Substantial tactical execution requirements
Fewer examples of “low-hanging fruit” with easy savings
Supplier identification and qualification requirements
These hurdles are very real and not going away any time soon. However, neither is the need to drive savings for the organization.
So, what’s a savvy procurement executive to do in order to keep savings flowing without the perfect set of resources, tools and expertise?
Focus on throughput: the quantity of output produced within a given time and set of inputs.
There’s an old saying in retail, “Sales cure all ills”. For sourcing, it would be “Throughput cures all ills”, because the more volume an organization puts through disciplined sourcing, the more savings it will generate. Even if the average savings rate drops a bit, the volume will more than make up the difference. Efficiency trumps effectiveness every time.
Five rules for maximizing the throughput of your sourcing efforts:
Don’t let the perfect get in the way of the good. A comprehensive, 12-week strategic sourcing initiative is the right approach for your $40 million IT hardware or ocean freight category, but probably not for your $125,000 office furniture purchase. A comprehensive sourcing effort might generate >20% savings but you will never have the time or resources to apply that kind of rigor to smaller spend. Instead, employ simpler, more efficient sourcing techniques to find savings. $1 saved on a category you weren’t going to get to anyway is $1 more than you had before.
Go after unmanaged spend wherever it is. Unmanaged spend is always a great source of savings. Why is it “low-hanging fruit”? Because no one’s picked it yet. Most organizations have less than 50% of spend under management (i.e. the portion of an organization’s non-labor spend that is actively managed by procurement resources and processes).
Keep different arrows in your quiver. Your organization has different sourcing needs. You should also have different tools to address those needs. Your job as a procurement executive is to triage projects as they come in and make sure the right tool is being used for each effort whether it be automation software, sourcing marketplace
Open up your network. The key driver for sourcing savings is competition, and competition is driven by opening up your network of potential suppliers. Benchmarks say that more than 40% of the overall sourcing process is allocated to finding new sources of supply. Given the number of seller networks available, make sure that you’re taking advantage of all the pre-built seller discovery sources available to you.
Get help, wherever it generates a positive return. It is said that procurement teams only have two kinds of things to do each day, stuff that is important, and stuff that is on fire. By the time you have dealt with the stuff that is on fire, there is no time left for the stuff that is important. Always leverage outside help to address those areas where you know there are savings but your team’s not going to have the time or expertise to get to it. While it might not be feasible to bring in expensive consultants or software to go after lower-dollar, less-strategic areas, there are multiple highly-efficient options for addressing this spend.
By following these five simple rules, you can apply the proven benefits of disciplined sourcing to a wider range of your company’s spend. In addition to the savings you’ll generate, the additional sourcing throughput will also provide increased levels of procurement discipline, supply risk management, transparency and support to your customers and stakeholders in the business.
About the Author
Kris Colby is a sourcing and procurement industry expert with more than 20 years experience helping organizations design and execute management strategies and initiatives proven to drive real business results. In addition to his consulting and sales experience, Mr. Colby has done substantial work in marketing, alliances and public speaking on multiple supply chain issues including eSourcing, procurement technology, supply risk and cloud computing. Recently, Mr. Colby joined FedBid, the fully-managed online marketplace revolutionizing how the government and businesses buy, as the company’s senior vice president for the commercial sector.