Strategic Sourcing: Are You Taking a Global Approach to Spend Management?

Many companies design their procurement function to review vendors and negotiate terms on a piecemeal basis. They may feel that their corporate spending habits are strong because their managers receive savings on items they previously purchased. However, this approach may lead to missed opportunities and purchasing inefficiencies because it fails to examine spend from a global perspective.

Strategic sourcing is an approach to supply chain management that helps organizations leverage their purchasing power to optimize spend. Doing it effectively involves not only managing the purchases of direct and indirect materials and services, but also determining whether to make or buy an item, and deciding when and how to outsource activities or entire departments.

Many companies fail to provide professionals with the adequate training and company data to thoughtfully analyze a sourcing opportunity. This underinvestment makes it difficult for professionals to truly understand business priorities. In this competitive world, strategic sourcing and corporate spend management must become a core competency that receives attention from the C-suite.

Understanding your current sourcing spend

Before you can create an effective spend management program, you need to understand your current sourced spend situation. The following are the first steps to get started with strategic sourcing.

1. Review your spending processes, which range from formal policies and procedures to the current list of authorized contract signers.
2. Centralize your contracts in order to easily review and gain a better understanding of all current contracts’ terms.
3. Analyze the overall expenditures and trends by appropriate segmenting (product/service categories, departments, vendors, etc.).

Assessing your operational capabilities

The next step in the process is to reassess how well your company can perform certain tasks or produce certain items in-house compared to outsourcing. Now you may be wondering: “How does this capabilities assessment factor into procurement decisions?”

As a very simple example, consider a bakery that spends an excessive amount of time making its cake frosting in-house. After assessing and comparing the process to alternatives, the bakery realizes it can purchase this frosting pre-made from a supplier at equal quality and a lower price (when factoring in labor costs). The bakery’s procurement team will now be responsible for sourcing this frosting.

Performing a capabilities assessment can give you a better picture of your business’ strengths, so you can identify opportunities to minimize spend and increase efficiency. This thorough diagnostic should help you identify the functions that make more sense to outsource to a third-party vendor or supplier.

As another example, a small to mid-size retailer might struggle with distribution and so may want to contract with a logistics company instead of managing a fleet of trucks and planes. Similarly, a smaller business may not be equipped to design a world-class billing department and may want to contract with a vendor who specializes in providing that service.

After analyzing your current spend and assessing your capabilities, you should identify functions that you plan to retain in-house and those that would make more sense to outsource. Now you can look at the outsourcing process and your company’s strategic sourcing framework on a more granular level.

Refining and improving your strategic sourcing framework

At the end of the day, the goal is to create a strategic sourcing framework that will continually execute the best deals for your company in terms of price, quality and service. Drilling down into your framework and improving the sourcing process may look something like this:

1. Form a centralized procurement team as well as sub-teams by appropriate segmentation (product/service categories, departments, vendors, etc.).
2. Each sub-team will create criteria for selecting vendors in their category.
3. Select the most appropriate vendors to participate in the bidding for each spend category, item and/or service.
4. Re-negotiate or re-bid current contracts for existing needs as well as open new bids for new needs. This process will ultimately narrow the vendor options to two or three finalists per group.
5. Begin the negotiation process with the finalists.
6. Select vendors and release the formal list of authorized vendors and agreed-upon prices internally. Add contracts to the centralized contract repository.
7. Evaluate the selected vendors’ performance per the contracted terms and your expectations on an ongoing basis.

At its most effective, strategic sourcing helps companies to leverage their purchasing power, continually re-evaluate their needs and improve procurement on a global level. Don’t leave this important part of effective supply chain management up to your procurement team.

Contact me or another member of Kaufman Rossin’s business consulting team for help with capitalizing on purchasing opportunities and improving strategic sourcing at your company.