Rather than come up with predictions for 2007 -- which everyone else is doing, and I've done already on an upcoming podcast -- I thought I'd share with you what I believe are some of the sourcing tactics that companies who get ahead in Spend Management next year will deploy. And I won't bore you with deep thoughts such as how "multi-attribute auctions" and "optimization" techniques can help you save an additional 5%. Yada yada yada ya. No, these suggestions -- at least I hope -- will be a bit out of the box. Let's begin.
First, I would suggest that more sophisticated Spend Management organizations will increasingly take a trading perspective to sourcing to model upside and downside risk. This will involve separating out and analyzing all of the total cost elements -- and cost break down worksheets pre-bid -- of truly strategic buys and taking advantage of areas wherever possible. What do I mean by this? It's not just about hedging downside risk. Rather, this approach is about looking for areas where suppliers are miss-pricing underlying contract component elements -- or are openly willing to trade less favorable terms for the business other than their quoted price.
For example, by creating sourcing strategies that separate out such areas as currency, logistics, freight, and import costs -- and adding them back in, to see how suppliers price them -- smart procurement organizations will discover even better total cost solutions than before, trading on true market and pricing inefficiencies in their supply base. Just as hedge funds made a killing in the early going by exploiting market inefficiencies in the pricing of currencies, equities, debt and derivatives, advanced procurement organizations will do the same by going after the same inefficiencies in supply market quoting, taking advantage of supplier mistakes in underlying contract pricing elements (other than just basic unit cost)
Second, sourcing and procurement organizations who align their own objectives -- or MBOs, if that's the driver of performance evaluations -- with the right set of corporate metrics and goals will deliver greater value. To give a real-case example, in volatile commodity areas, these up-front goals might be to minimize downside risk rather than maximizing short-term savings potential. Hence, quantifying and measuring both actual savings and cost avoidance based on metrics that role up to the business is absolutely key. I can promise you that as the year starts, if you spend a few weeks creating a shared vocabulary and definition of goals between procurement and the business, it will more than pay off. And in doing this, I would suggest placing just as much emphasis on cost avoidance -- or risk minimization -- as classic savings measures.
Third, take supplier rationalization strategies a step further. Don't just reduce your supply base and competitively negotiate more spend -- take a keen interest in developing your strategic suppliers, not just to reduce risk, but to reduce costs. For example, take an active role in negotiating and locking in pricing for their commodity items and spend (such as metals, energy, etc.) related to your production. And invest in parachuting in Lean and Six Sigma teams to reduce waste, rework, and inventory. And make sure your suppliers have got standard sourcing systems and processes in place so that once you leave, they'll be able to continue to drive additional savings opportunities (heck, if your licensing allows it, give them access to your Spend Management tools and applications, and agree to share in the savings that result).
I know I said that I'd offer up three sourcing tactics, but for the sake of paying some lip service to indirect and services spend categories -- which I should have done earlier in this post -- I'll even give you a fourth. And this piece of advice is to bridge the gap between savings identification in indirect and services spend categories and savings capture. By this, I mean that it's critical to ensure that the frontlines of the business can easily access negotiated pricing and terms. To make this happen, it's critical to make sure your e-Procurement system covers as many categories and suppliers as possible. And invest in frontline solutions like Rearden commerce for T&E and services spend categories. I can't emphasize enough that implementing indirect and services savings can be as challenging as unearthing savings opportunities in the first place. And it should be procurement's role to make the savings capture of indirect and services real, not just theoretical.