Not All Spend and Suppliers Are Created Equal

Spend Matters welcomes this guest article by Rick Long, vice president at BravoSolution.

“When all you have is a hammer, everything looks like a nail.”

Unfortunately, this common phrase is all too often representative of the approach taken by many so-called “strategic” sourcing organizations, where sourcing professionals go blindly into strategic sourcing exercises using the wrong tools or techniques for the situation.

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In some cases, they leverage totally inappropriate tools for the category just because they have them. In others, they sub-optimize the results they generate for their company because they try to take a one-size-fits-all approach to sourcing and supplier management. Both bring some value, but only a fraction of what could be achieved with the amount of time and energy spent.

Savvy sourcing professionals use a variety of tools to determine the most appropriate approach to sourcing each category. They leverage time-tested methodologies like Porter’s Five Forces or Kraljic Models to help understand their company’s spend better and properly understand their relationship with each segment of their supply base.

The greater the spend and the more strategic it is to your company, the more likely it is that using common sourcing techniques and tools for that category will not give you the most optimal results. Basic sourcing tools with traditional RFx and Reverse Auction capabilities can certainly be leveraged to drive considerable cost savings for companies. Simply automating what is often a manual process that was done by email, Word and Excel allows organizations to run more sourcing events with the same resources. It is all about efficiency – run more events with the same number of people and save more money.

But more complex, high-spend categories deserve a different approach tailored to the category. Indirect categories such as transportation, facilities management, packaging, services and MRO as well as most direct materials categories deserve this special attention. Not only do they represent a majority of most company’s spend, they also are typically supplied by your most strategic supplier partners. No longer is efficiency the main objective during the sourcing process – with these categories and suppliers, the focus must shift to the effectiveness of the sourcing process.

Effectiveness has different definitions depending on the category. While there is always a desire to reduce cost, in your most strategic relationships it is no longer always at the expense of the supplier’s margin. Collaboration efforts look for win-win ways to preserve supplier margin and still reduce the overall supply chain cost while delivering real value for both parties. The words strategic and partnership are magnified in these relationships, and supplier collaboration is a core tenet of the way business is conducted.

Sourcing solutions focused on these strategic categories help manage the complexities of the sourcing process and help to optimize the award of business in ways that no human(s) with complex spreadsheets could realistically do. Just as importantly, these solutions help manage the supplier relationship in a way that generates value for both parties.

Bravosolution

Seldom, if ever, does one-size-fits-all make sense for a sourcing organization’s toolset. No matter what industry you operate in, supplier and category segmentation exercises indicate that certain suppliers and categories are more strategic to your business. While basic e-sourcing is always a step up from manual efforts, the savvy sourcing professional recognizes that there is a need for both the efficiencies generated by foundational e-sourcing tools and the effectiveness of leveraging category-specific approaches in their sourcing and supplier management processes.

First Voice

  1. Garry Mansell:

    An excellent post Rick.

    Where sourcing is concerned it is vital to use not just the right tool for the job, but also to use the right approach. Sometimes reverse auctions are fine, sometimes doing nothing is the right answer, and sometimes simply spending time with the supplier is the best way forward. But in complex categories, where there is significant spend, significant risk factors to take account of and a number of business constraints to consider, software such as that provided by Bravo, ourselves and a limited number of other optimisation based providers can transform the buying process.

    What we are though are simply enablers. The software does not take the place of good, sound, procurement professionals who know their market and are trained in sound buying techniques. I am convinced there will always be a place for such individuals in organisations, even if you choose to outsource the function.

    When you combine the right approach, with the right tool and excellent buyers the results will follow. I can underwrite the details Rick included in his table of potential savings. Not every company or event will achieve savings of that nature, but in our experience many do, especially if they have never deployed tools such as those we are talking about before. The categories we see people deploying our software in most mirror those in the table. Logistics, Packaging, MRO and Facilities Management combined account for nearly half of the Billion dollars a week we see procured through our software platform, but inventive buyers are continually finding new ways to use the software.

    Market informed sourcing using optimisation is coming of age, we are seeing growth of greater than 20% year on year in demand for our services but there is a long way to go yet. The good news is the best buyers are indeed starting to use the best tools for the job.

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