TOOLS TO ‘OPERATIONALIZE’ SOURCING STRATEGIES
The key to strategic sourcing is to integrate sourcing with procurement through analytics and contract management. The following design tools are key enablers in ensuring the same:
Formal, preferably multi-year Procurement Plan to project, audit and regularly validate procurement savings
Design Aspects:
o Procurement’s impact on strategic vision, business plan and key financial metrics need continual focus
o Analysis of current costs (direct, expense, capital) and cash flow forecast
o Prioritized listing of key spend categories, savings targets and benefit goals
o 3-5 years buying strategy for each material
o Actions to measure key supplier relations
o Touch-points with other business initiatives
o Assigned business, finance and procurement resources
o A time phased savings plan
o Cash flow elements such as Working Capital, Trade Financing, Payment Terms to be part of Procurement savings goals
Focus on all items & services- not only direct items. (On an average 18.5% of revenue is still uncovered by Procurement, per an Aberdeen Research report)
Design Aspects:
o Minimize maverick buying; track % unplanned / unstructured buying
o Track actual vs. Plan for indirect items & expenses as well.
o Expense Automation System – Instituting a system and periodic expenses analysis can deliver 6-7% savings.
o Volume Leveraging – Concept applies not just to big ticket items but in other categories also, eg.
MRO items.
Effective Contract Management
Design Aspects:
o Create Contract based on Bid Awards
o Share Contracts internally & externally to obtain necessary approvals
o Publish Contracts to Backend system
o Monitor consumption, expiry, and compliance
There is 20 – 25% leakage in savings due to poor compliance of contracts, according to some leading sourcing experts
Better Analytics Capability
Design Aspects:
o Supplier Performance Measurement and Contracts based on data-based performance measures
o Suppliers’ SWOT Analysis
o Total Cost Analysis
o Capture Supplier’s Cost Structure
o Multi-attribute decision making models and what-if scenarios
o Competitive Benchmarking
Efficient Buying Tools : E-Auction & E-RFP/Q
Design Aspects:
o Share RFPs for internal approvals
o Distribute RFQs to existing & potential suppliers
o Train suppliers on RFx / E-Auction
o Conduct the Auction & Share Results
o Track entire process with graphical display
Procurement Performance Scorecard
Design Aspects/ Key Variables:
o Material Price Variance
o # Stock Outs
o Lot Sizes & Lead Times
o Supplier Reliability on Quality, Quantity & Timeliness of deliveries
o Trade financing options & payment terms
o Purchase Cycle Time
o Ownership of material price variance by Procurement
o Performance tracking against last year, market, competition & imports
o Cost targets to flow out of competitive value chains
o Balanced focus on Cost & Supplier Capability (quality, service, innovation, flexibility)