The Five Principles of Sourcing – Commerciality

We’ve been telling you about our Five Principles of Sourcing for a while now, and we’re pleased to announce the publication of the penultimate paper in the series, produced with support from our friends at complex sourcing technology firm, Trade Extensions. Having covered Coherence, Openness, Rigour and Alignment already in previous papers, this time round we are talking about our final principle, Commerciality.

Our idea was to mimic the philosophies that underpin many of the biggest and best firms in the world. Mars has its own Five Principles; Johnson & Johnson has its credo. We thought it was interesting to consider how procurement professionals might look at the whole area of sourcing, which is so fundamental to procurement success, and define some principles that might inform good practice.

So, what about “commerciality”? We chose that as our final principle because it seemed to encompass much of what we had already talked about, yet also added a new element. That is the sense that everything we do must come back to being “commercial” – looking to achieve benefits and competitive advantage for our organisations through putting in place and managing effective “commercial” deals.

The paper has a number of sections. The first covers commercial (and competitive) advantage. This comes back to the fundamental purpose of all sourcing and procurement activity. For the private sector, at least, it must be to use the external market and suppliers in the optimal manner to generate competitive advantage for the business.

The second topic covered really could justify its own “white paper” – or even a book. It relates to how procurement professionals and others choose and implement the most appropriate and effective pricing and contractual models. There are so many ways to construct pricing mechanisms, gain and pain share arrangements and other commercial aspects of the contract and relationship, and choosing the most appropriate for each situation requires considerable skill.

The third section in the paper looks at the growth of what we have called network and supply chain sourcing. That is a growing area of focus for major firms and describes activity usually described as advanced optimisation (or market informed sourcing). Technology is used in a manner that goes well beyond what is usually considered to be “sourcing” in the traditional sense. To give two examples  of this advanced approach, the paper looks briefly at network optimisation and multi-tier sourcing optimisation, with a brief case-study for each.

Our final section takes a look at negotiation; despite all the clever technology at our fingertips these days, we must not forget that there is still a role for negotiation – and people who are expert at it. Major sourcing projects and exercises will always have a need for negotiation, we believe.

We will come back in future articles with some excerpts from the paper, but you can download it now, free on registration, from the Trade Extensions website, along with the three previous papers in the series which cover the other principles.

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